ASPs - removing the support burden

Application Service Providers promise a lower cost-licensing model, reduced support overhead and a future proof upgrade path - sounds too good to be true

IT budgets may have grown slightly over the last few years but these increases have also been absorbed by Y2K compliance and the widespread migration to NT. The e-business revolution now expects true 24/7 operation to be maintained by fewer staff with more concurrent applications. Deploying new applications or services can prove equally problematical. The financial costs of a major IT project based on complex formulas combining staff training, network management, installation and licensing cost, which when added to "teething" problems can cause estimates to spiral out of control. One industry response to this problem is ASPs.

This is not essentially a new concept; the bureau mainframe systems linked to low-cost terminals of the 1970s are essentially the localised version of the ASP concept. When the cost of a typical IBM 390 mainframe installation was measured in the £millions, large companies or several smaller companies would typically deploy low cost terminals that would connect to the mainframe applications only on demand. Improved communications infrastructure combined with Internet VPN technology has brought the legacy "Computing Bureau" back, and it is now possible, across a much wider area, to sell this idea now that we have a modern name.

Case study

The first applications to be re-badged within the ASP model have tended to be focused on mail/web services such as Lotus Notes.

In early 1996, Swiss Re, one of the world largest reinsurance companies, decided it needed to utilise the Internet and cost-effective communications to continue competing on a global scale. At that time, the company operated a number of disparate mail systems hosted on mainframes to provide external communication. Swiss Re had access to the Internet, but the interface was not user friendly and file transfer became an awkward and unreliable procedure. The company wanted a solid communications infrastructure, capable of serving many geographical areas and suitable for both internally and externally based project teams.

In order to unify communications to one messaging and groupware platform, Swiss Re's CEO made the strategic decision to migrate all of its employees from mainframe email systems to Lotus Notes. A huge under-taking, this project took 14 months from planning to final implementation.

Swiss Re also began to develop an external communications strategy to run in parallel with its internal Notes system. A single robust email system would give divisional personnel a transparent communications channel in which to work with reinsurance consultants, customers, suppliers and other regional Swiss Re employees worldwide.

Swiss Re decided that outsourcing its external Notes email infrastructure was the only commercially viable option. The company needed to implement a system very quickly and avoid making a heavy investment in hardware and specialised technology skills that were not core to its business objectives. This being the case, the company chose not to investigate the likely costs of developing and maintaining such systems in house.

For this, Swiss Re choose US-based Interliant, a specialist in managed and hosted applications and services (ASP). Within three months Interliant had implemented 38 Notes connections in Europe, the Americas and Asia - across all sites belonging to Swiss Re and its business partners - enabling the external exchange of Notes-to-Notes and Internet mail. Because Interliant's technical staff manage Swiss Re's external Notes infrastructure, only two Swiss Re personnel are employed in hands-on, technical roles for the company's external messaging.

The messaging gateways enable message transfer among heterogeneous mail systems via Notes, X.400 and the Internet. One of the immediate benefits of Swiss Re's outsourced email system is that it has considerably reduced the time and associated costs of developing specialised insurance training courses for its business partners. Prior to this, the only means of developing courses and other Notes applications was to visit each party involved individually. This was both expensive and time consuming, often requiring transatlantic travel and then further follow up work via telephone or fax. Through the hosted email system, Swiss Re and partners can now collaborate on course development projects swiftly and effectively from its own desktops.

ASP in the UK

Although this example concerns a Swiss and US company, the UK's own telecoms behemoth, BT, has offered a managed Lotus Notes service for the last five years and is piloting a range of managed services including Microsoft Office 2000 applications. Of the ASP services that BT is currently offering, the most exciting for many companies is the Business Manager suite featuring SAP's R/3 software. Currently, only the Accounting and Payroll modules are available. Human resources and CRM applications are imminent, however.

In a recent interview with ITNETWORK.COM, Angus Fox, Strategy and Alliances Director for BT Applications Hosting outlined the direction for BT services, saying: "We look at the potential UK ASP market as three key sectors, defined broadly as Personal, Collaboration and Enterprise. We envisage the personal space for mass-market desktop applications such as MS Office 2000, Collaboration via (Lotus) Notes or (Microsoft) Exchange, and enterprise through products such as SAP R/3."

The loss of controls that some IT departments fear is something that Fox recognises, saying: "Moving the burden of support associated with complex package frees up time for more pro-active task. Nobody want's highly skilled and valuable support staff installing and configuring Microsoft Office all day. With a portion of the support burden outsourced, IT staff can be proactive as opposed to fighting fires."

Fox also admits that BT are not going to rush into the ASP market, commenting, "We have offered a Centrally managed Lotus Notes solution now for over four years, this experience will allow us to offer ASP services with a high level of confidence. What we don't want to do is launch services before we have properly piloted them - if we get it wrong, we will lose both customers and brand. We will not get it wrong."

Next year BT will be launching a whole host of ASP products with a pricing model likely to offer a real incentive to large enterprise. SAP R/3 is a good example of an application that provides the biggest advantage when applied in the ASP model. With typical installations of SAP R/3, costing in the millions and requiring months to implement, the prospect of outsourcing the job is very attractive to IT departments. Especially as outsourcing means that a potentially expensive CRM solution now becomes affordable and, most importantly, users can provide a bottom line yearly or even monthly figure for the whole solution including the costly and highly variable implementation phase. With all these potential advantages, the question remains as to why the uptake is still sluggish?

A questions of standards

Well, the first main hurdle is the poor communication infrastructure in Europe and high telecommunication tariffs when compared to the USA. Another problem is the lack of awareness regarding the ASP concept, some of this is due to the highly competitive and often secretive nature of the ASP vendors.

For a potential customer trying to asses the potential savings gained by an ASP implementation there is scant hard and fast examples of a competitive advantage. Additional concerns such as security, enforcement of Service Level agreements and plain old fear of change makes acceptance very difficult.

The ASP consortium is trying hard to change this perception. The ASP consortium has grown to over 100 technology companies in every area of the IT industry. Traditional Fat PC manufactures like Compaq and Hewlett-Packard are aligned with Thin Client specialists such as Wyse and Boundless plus a host of telcos, ISPs and integrators.

Tim Pickard, a senior VP and European spokesman at Netstore Group, says: "We admit that for potential customers it is tricky to assess both the quality of an ASP or VAR within this market. As a industry, we are changing this through partnership programs and standards committees." Netstore are in a good position to gauge the potential ASP market as they currently provide services for over 12,000 users in the UK alone.

Cisco, Logica and Citrix, plus a host of others, currently use Netstore's online backup and recovery services. Their fixed pricing policy is simple and transparent, unlike most purveyors of ASP services that tend to be very vague regarding pricing and direction.

The analyst view

Industry analyst Richard Wendland's recent ASP report for Durlacher Research offers an insight into the likely ASP pricing model. He believes that: "Whilst there is little difference in the costs associated with supporting an application server with one business customer and 500 users, and 10 businesses with 50 users, the actual costs associated with deploying a single server for 10 low yielding business customers can be significant." With modern server segmentation, software that allows ASPs to securely run a number of different businesses applications on a single hardware platform significantly reduces this overhead.

His report also indicates that "simple supply and demand economies apply to any market. As the availability of hosted applications increases, costs are likely to fall as ASPs use pricing as a way of differentiating their services. Internet access in the UK can be used as a parallel to illustrate this".

The report also indicates that the ASP-for-everyone approach may not work at first, and goes on to comment that: "Although it is openly claimed that the ASP solutions being launched are targeted at the SME market (50 - 500 user businesses in the case of BT/SAP), we believe that technical and operational factors, coupled with immature pricing models, may not make this segment profitable for top-tier ASPs." The reports continues with: "Whilst one could argue that this segment of the market could be run at a loss, we believe that (as illustrated by the strategy of Qwest/SAP/HP) these large tier 1 ASPs are much more likely to target the high-end of the SME market (enterprises with US$200 - 500 million revenues)."

Durlacher's free 16-page report makes very interesting reading, Wendland's feeling is very positive but he equally segments the ASP market into three tiers. For smaller companies, the ASP model does look like a bit of a pipe dream.

Summary

The European ASP market is expected to be worth US$1.5 billion by 2004. With this prospective revenue, the ASP concept is an exciting one. Potentially, it brings expensive applications within the reach of companies that would have traditionally avoided the long-term financial burden. At grassroots levels, the weight of support could be removed from the overworked site-based support staff while providing opportunities to improve systems not just firefight. Choosing applications on a monthly basis, or when and if necessary, is a business model that will become the norm providing the right climate is created. The formula needed to make ASP the method of choice for business applications is simple: reasonable priced always-on communications connected to suitable applications from reliable vendors. Unfortunately, the climate for the high-value ASP solutions is not quite here yet, at least not for the SME market.

Probably, the best analogy favouring the ASP concept was given by a small VAR desperately trying to sell ASP to a potential customer. "If you want a pint of milk, you don't buy a cow. Trouble is, at the moment, everybody seems to want to buy a dairy farm."

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